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DEED and weed: Loan to Missouri cannabis company is not a done deal, says one of state agencies overseeing the plan

The Department of Employment and Economic Development, which administers a fund meant to promote job creation in the Iron Range, said it is not bound by an endorsement of the project by the Department of Iron Range Resources and Rehabilitation board.

Commercial Cannabis Growing under Lamps
via Pexels

One of two state agencies that are in the process of making $20 million in financing available to a Missouri-based cannabis company said Thursday the loan is not final and that the agency is continuing to examine the plan.

The state Department of Employment and Economic Development that administers a fund meant to promote job creation in the Iron Range said in a statement that an endorsement of the project by the board of the Department of Iron Range Resources and Rehabilitation does not bind DEED.

The IRRR Board vote is an early step in the financing process — so far, no loan has been issued,” the department said in a statement Thursday. “Any release of money will not happen until the borrower gets a cannabis license from the state. As with many projects on the Iron Range, IRRR asks DEED to consider buying participations in loans for projects.

“After IRRR’s preliminary approval and Board vote, DEED will conduct its own due diligence and validate documentation for the approved project before potentially dispersing from the 21st Century Fund,” the statement concluded.

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At a meeting Tuesday, the IRRR board voted 5-3 to recommend $20 million in loans to a limited liability company called HWY35 to renovate parts of a former wood products plant in Grand Rapids to house an indoor cannabis growing facility along with a manufacturing wing to extract oils from the plants and produce edible products.

If it meets hiring goals of 150 and then 175, up to $15 million can be forgiven. The rest will be assessed below-market interest of 4%.

The two-phase plan is set to cost $67.8 million. Along with a $2 million grant from a city of Grand Rapids tax increment financing district, the state and local money would make up about one-third of the capital costs of the project. HWY35 is led by a Missouri cannabis entrepreneur — Jack Mitchell — as well as a Minneapolis marketing company owner with roots on the Iron Range. John Hyduke, the chair of Modern Climate, is a former University of Minnesota Duluth hockey player who began an advertising career in Duluth.

“We could get up and operating before 90% of the market,” Mitchell told the IRRRB. “There were only two operators in Missouri for the first several months, and at the end of the first year there were only about 10. Consequently we had extremely high prices. We still have huge product shortages.”

The board endorsement came after a staff presentation that detailed the deal: the $20 million would come in equal $10 million parts from two funds created to help the range diversify from overdependence on mining — the Douglas Johnson Economic Protection Trust Fund and the Minnesota Department of Employment and Economic Development 21st Century Fund. According to state law, the commissioner of DEED “must, at a minimum, conduct due diligence research regarding the proposed loan or equity investment, including contracting with professionals as needed to assist in the due diligence.”

The law goes on to say that while the commissioner may make conditional commitment for loans or investments, “disbursements of funds pursuant to a commitment may not be made until commitments for the remainder of a project’s funding are made that are satisfactory to the commissioner and disbursements made from the other commitments sufficient to protect the interests of the state in its loan or investment.”

HWY35, like any other cannabis business in Minnesota, must wait for the new Office of Cannabis Management to draft rules and create an application process for licenses. That could take more than a year. In addition, the new cannabis law caps cannabis cultivators at 30.000 square feet of plant canopy — about half a football field. Only if demand is exceeding supply can the state cannabis office double that allowed canopy. HWY35’s business plan is dependent on winning the doubling of plant canopy. Mitchell told the IRRRB this week that he wants to be one of the first suppliers and take advantage of high prices that will result from shortages. He then hopes to convince the cannabis office to give him more growing permission.

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Some backers of the legalization bill have questioned why the state would back one competitor, especially one with out-of-state roots when the bill called for an in-state industry and especially a large, multi-state operator when the bill envisioned smaller business. By keeping businesses small by capping production and retail business size, the drafters hoped people with less access to capital, especially people of color, might have a chance to compete.

Gov. Tim Walz acknowledged questions about the IRRRB deal during a press availability Wednesday. Walz said that questions asked by reporters were similar to those he asked of his staff at a meeting that morning.

MinnPost photo by Peter Callaghan
Gov. Tim Walz addressed questions about the HWY35 grant after a St. Paul press conference on public safety funding.
“How’d we get to here? How was the decision made? How did the board decide? Who else applied? We should find that out?” Walz said his questions were. “This is the age-old question: Is government picking winners and losers? Is it the appropriate thing to do this?.

“And the answer may be yes. If you’re Grand Rapids and you’ve lost a lumber mill and a lot of jobs and you’re wondering where economic development comes from, maybe this was the way to spur that. Maybe this is the right decision,” Walz said.

The governor expressed unhappiness that his office didn’t know the deal was happening until afterward. He said he doesn’t get a heads-up for all agency decisions but  “one of my questions this morning was ‘Don’t you think anything dealing with cannabis, I’d probably like to know about when they’re doing it?'”

Walz appoints both the commissioner of the IRRR, Ida Rukavina, and the DEED commissioner, Matt Varilek.

The project was pushed by Rukavina and was endorsed by the city of Grand Rapids, Itasca County as well as the local chamber and local economic development board.

“While we know that not everyone will agree with this type of industry, it is now legal in the state of Minnesota,” Rukavina said. “If it doesn’t happen here it is going to happen somewhere else in our state.”

Interim Office of Cannabis Management director Charlene Briner released a statement Thursday in response to questions about the HWY35 project and its hoped-for increase in allowed plant canopy: Keeping social equity at the center of our work to stand up Minnesota’s new cannabis industry is among our most important priorities and foundational to the regulatory work the Office of Cannabis Management will be tasked with carrying out. OCM will continue to work collaboratively with our state agency partners as they administer new and existing programs that impact and support Minnesota’s cannabis industry. As OCM begins rulemaking, business licensing will be among the topics addressed. OCM has not made any determinations or commitments for any individual business to receive a license.”

Also Thursday, the IRRRB member who raised most of the questions about the deal, said in a letter to constituents that he remains skeptical. Sen. Justin Eichorn, R-Grand Rapids, said he still questions why government money should cover one-third of the cost of an enterprise, how that exceeds investments in other projects on the Range and how the commitment is coming well before licenses are available or granted.

“Why is this being rushed?” Eichorn wrote. “Licenses won’t be issued for a year and a half. We don’t yet know who will get licenses. We don’t know what the regulatory environment will look like. We should not encumber this huge amount of money this early in the process. It is a classic case of putting the cart before the horse.”

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Eichorn also said he is stunned by the reaction from some involved in the project. 

“Yet, since voicing my concerns I have been threatened, harassed, and intimidated by individuals involved with the project in a way that I haven’t been on any issue I can recall. It has been, frankly, stunning.”